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Russian tax authorities have tracked their WTO bid over the past year by exempting profits tax on the key education and medical services sectors under a one-year-old tax code.
Hong Kong Trade Development Council (HKTDC)
31 December 2011
Russian tax holiday with WTO approval

When Russia's formal accession to the World Trade Organization (WTO) was finally approved on 16 December in Geneva, Russian Economic Development and Trade Minister Elvira Nabiullina said there will be no losers in a win-win game.

But in what has been seen as harking back to the somewhat lawless 1990s, Russian tax authorities have tracked their WTO bid over the past year by exempting profits tax on the key education and medical services sectors under a one-year-old tax code.

The overall reaction in the business community varies from enthusiasm to naked speculation, much as it is expected to do as Russia under the WTO picks up traction. Certainly, genuine market players welcome the move.

Schools, higher education establishments, clinics and hospitals licensed for business must present their valid licenses to the tax inspectorate to automatically obtain a tax exempt status for the period of the license's validity.

All education establishments, from pre-school to postgraduate, as well as the whole gamut of medical services are exempt from profits tax.

Only the major banks and the Skolkovo Innovation Zone outside Moscow (and called the Russian Silicon Valley) had previously been able to legally avoid profits tax. Residents of other special economic zones were only partially exempt.

The rationale behind this year’s unprecedented move by the Russian government is for the new benefits to trigger the development of private education and medical services, enabling them to better compete with government services in these sectors.

The government expects the quality of services to improve and prices decrease as a result, over the longer term.

There are also plans for transferring some state responsibilities for education and medical services to private businesses.

Already, most private, higher education establishments are far better developed now when compared with the private medical sector.

Private clinics account for about 5% of Russian health care facilities and profit margins in the sector are a far cry from the huge financial services returns.

However, they net between 20% and 30% returns on investment in Moscow and up to 25% in other areas of the country; that’s a stable and sustainable flow of income and banks as well as private investors are looking to medium- and long-term returns, comparable with world-class private sector operations in other countries.

The best-known and highly considered medical services are provided by the Medsi chain of clinics owned by AFK Sistema, the European Medical Centre chain and Meditsina chain. They all started in Moscow, then reaching first-tier cities across Russia.

They are now expanding into second-tier Russian cities as well as nearby Kazakhstan and Ukraine.